Revenue Rises, Comps Fall At Carmax
Carmax (NYSE:KMX) has been riding the same wave of demand that has been lifting the entire after-market car industry all summer. Rising prices for new vehicles and low-interest rates being the primary drivers of this demand. The company has been outperforming the market’s expectations all year but the good news may be coming to an end. The Q3 report was better than expected but underlying metrics reveal business isn’t quite as great as it looks.
“We delivered strong EPS growth this quarter thanks to solid execution by our teams,” said Bill Nash, president, and chief executive officer. “Despite the near-term market challenges due to the trajectory of the pandemic, our fundamentals remain robust and reflect the strength of our diversified business model spanning retail, wholesale, and auto finance. This strength, combined with our emerging omni-channel experience, is a unique advantage in the used car industry that firmly positions us to continue growing our market share while creating shareholder value over the long-term.”
Carmax Beats On The Top And Bottom Line
Carmax beat the consensus on the top and bottom lines but the reason why isn’t quite what the analysts were expecting. The company reported $5.18 billion in net revenue and beat the consensus by 360 basis points but not because of direct car sales. Or not because of organic growth, to be more to the point. The total volume of used cars sold increased by 1.0% due to the company’s expansion. The average selling price also increased, by 3.3%, but the comps for existing stores came in negative. Comps of -0.8% missed the consensus by nearly 500 basis points.
The company’s strength for the quarter is firmly centered in the wholesale market. The sale of Wholesale units rose 10.8% by unit volume and 23% in terms of dollar value to more than offset the weakness in direct sales. Revenue from Carmax Auto Finance also aided results. Auto Finance income increased by 54.7% due to lower loan loss provisions, higher interest margins, and more accounts on a YOY basis.
Moving down, the company’s gross margins contracted by 60 basis points and more than expected. Margin contraction is due to higher prices for cars, increased advertising, the 5% expansion of store-base, and increased spending on tech. Tech is important because Carmax doubled-down on its digital channels over the summer in an attempt to compete with the likes of Carvana (NYSE:CVNA) and Vroom (NASDAQ:VROOM). Just as an FYI, I have bought a car from Carmax before and it was easy. This year, my family purchased a vehicle through Carvana and it was the best car-buying experience we’ve ever had. I recommend it.
On the bottom line, the GAAP EPS came in at $1.42 per share or $0.29 above the consensus on higher realized prices, higher wholesale volume, partially offset by the reduction in margin. Looking forward, the company is expecting to open 8 to 10 new locations in the coming year but offered no formal guidance or market outlook.
The Technical Outlook: Rangebound Carmax Moves Lower
Shares of Carmax have been trapped in a trading range since hitting their 2020 high and all-time-high over the summer. The price action before the release implied a high-expectation for Carmax’s results that weren’t met. The price has fallen more than 3.5% in the wake of the release and in danger of reversing direction within the range. Pre-market action is still above the short-term moving average. If support confirms at the EMA sideways to upward action should be expected. If the EMA fails to hold prices up a move down to the bottom of the range is likely.
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